ECB lowers interest rate in effort to avoid deflation

June 5, 2014 - 17:26 AMT

PanARMENIAN.Net - The European Central Bank (ECB) has lowered its benchmark interest rate to 0.15% from 0.25% in an effort to stimulate economic growth and avoid deflation in the eurozone, according to BBC News.

It has also reduced its deposit rate below zero, to -0.1%, which means commercial banks will have to pay to lodge their money with the central bank, rather than receive interest.

The idea is to incentivise the banks to lend to businesses, thereby stimulating growth.

The ECB is the first of the "Big Four" central banks (the ECB, the U.S. Federal Reserve, the Bank of Japan and the Bank of England) to do this.

Although the danger of deflation in the eurozone is limited, the ECB is concerned that growth is very sluggish and bank lending weak - both of which could potentially derail the fragile economic recovery.

The eurozone economy is only growing at 0.2%. Consumer spending, investment and exports are all growing at a slower pace than this time last year.

Inflation in the Eurozone fell to 0.5% in May, down from 0.7% in April. This is well below the European Central Bank's 2% target.

If the eurozone slips into deflation, consumers would spend even less because they'd expect prices to fall in future months. For the same reason investors stop investing.

Growth would then grind to a halt and demand would be severely constrained. The large debts amassed by the eurozone's countries, companies and banks would take longer and be harder to pay off. Unemployment, which is already at nearly 12% in the eurozone, and much higher in places like Spain, Portugal and Greece, would get even worse.

It's a picture that prompted moves by Mario Draghi and the 23 other members of the governing council at the European Central Bank, the BBC says.